Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q1 2020 conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the call over to Sebastian Steffen, Senior Vice President, Investor Relations. Please go ahead.
Thanks very much, Stuart. Good afternoon or good morning to those of you joining us from the U.S., welcome to our first quarter 2020 results conference call. First of all, I hope you and your families are well. Our presenters during today's call will be our CEO, Kasper Rorsted, and our CFO, Harm Ohlmeyer. As always, we will kick it off in a second with the prepared remarks from Kasper and Harm, followed by the Q&A session. During the Q&A session, as always, I would like to ask you to limit your questions to two in order to give as many people as possible the chance to ask their questions. Now over to you, Kasper.
Thank you very much, and welcome also from my side. Today, first, we'll give you a high level on both short and long-term aspects of our business, then a brief update on the business and the financials in the first quarter, then a deep dive into how we operationally address the challenges and opportunities, and finally, current trading and the outlook. We are indeed living in unprecedented times, not only around the globe, but also for sport and for adidas. Globally, 185 countries, which is 93% of all countries in the globe, have confirmed cases of COVID-19, and the remaining seven have not. % doesn't mean they don't have. Currently, there are no sporting events. All sporting events canceled or have been postponed. Major events like Euro, the Olympics, or tournaments in the different countries, local runs, are all put on hold at this stage.
60% of our businesses have standstill since mid-March. That means 60% of our business is completely closed. Stores are only open in a few countries, and more than 70% of our global stores are still closed. The only consistent store that's open 24 by seven and is more important than ever is, of course, adidas.com or reebok.com. During this crisis, our first and foremost priority has been the security and health of our employees. What we've done is we've shut down most offices as a precautionary measure to protect our employees. That means that more than 40,000 people today are working from home in flexible work environment.
I have to say that we're very proud to see our employees are coming together to support each other, our business, and our communities, and work in a digital set up that probably two or three years ago, none of us would have believed to be viable. Secondly, is to ensure the financial viability for our employees and remain committed to protecting them and their families. Of course, we know that not only financially but also exposure-wise, particularly our retail staff, has been more exposed than the rest, and our DC staff that's currently working, whom we're very proud of. Secondly, ensuring that our supply chain continues to stay up. Many of our partners have been around for more than 10 years, actually 85% of our partners.
We have a deep responsibility for the extended supply chain to ensure that they will be around when the crisis go away. We'll speak more about what we're doing to make certain that this important partner and important chain of our value chain will remain up. At the same time, we want to support the global community, whether that be with safety equipment, where we're working with Carbon in the U.S. to produce face masks or local manufacturing in the different countries, which we're doing as we speak. We've made financial donations to the WHO Solidarity Response Fund, to the China Youth Development Foundation, and other initiatives. In our e-com, we give a EUR 2 or EUR 2 donation to the WHO Solidarity Response Fund for every e-com purchase above EUR 20.
We've ensured that people work out from home by giving them access to a premium part of our Runtastic app, and hundreds of thousands of athletes using our videos to make sure that they train and stay fit from home. This is a very important part because a big part of the global population today are "locked up" in apartments or houses and are not allowed to get out, and their wellbeing is important for us moving forward. When I look upon how we've been running the company for the past six weeks, it's really been divided into three groups, increase flows, reduce outflows, and additional financing, meaning we went from a P&L to a balance sheet because that was what was required. We changed the way we did this mid-March. Basically, we had the following priorities. More aggressively push e-com and reallocate resources to e-com.
Secondly, doubling down and recover in China and Korea and where opportunities come. Number three, of course, intensify collections wherever possible. When we look upon the reduced outflows, it was practically adjust the order book and use flexible cost base without jeopardizing future prospects. We'll give you more details later. Of course, also on the CapEx side, basically stop retail expansion, remodeling, and new IT projects, and reallocate the resources from IT to a digital setup. Then, of course, look upon the underlying financing. What we have done is we believe that financial flexibility is key. The majority of businesses are closed and uncertain when they will change. What we've done is we've tapped into existing credit facilities and repatriated cash from foreign subsidiaries. We have access now to additional EUR 3 billion of cash through the KfW syndicate loan, which we'll use to bridge this unprecedented situation.
Harm will speak you more through this in detail. In this context, we'd like to thank the German government for its fast and comprehensive course of action in response to this global crisis. What are the long-term implications for the industry? Here I'd like just to pause a second because I think it's important that we get the long-term very clear ahead of us. We believe that health and sport will become even more important to the consumers moving forward. I believe very few people globally have not thought about their own health almost on a daily basis in the last six to eight weeks. The move towards a more health and exercise-oriented global population has been accelerated through coronavirus. Maybe not in the short term, but definitely in the medium term and in the long term.
The global brands and brand strength matters more than ever, behaving appropriately and also being present and engaging with the consumer throughout the crisis is extremely important. Thirdly, we are seeing a fast-forwarding of the digital transformation. Since 2016, digital has been our agenda as a digital cornerstone, but there is no doubt that the acceleration we are seeing right now towards a more digital and D2C-led company is getting a huge step forward compared to a normal setup. There are long-term implications for the industry, where several of them are very positive. That does not preclude that we have significant challenges in the short term, but the medium long-term remains or has increased in the positive outlook. Let me take you through the business update. We continue to leverage multiple dimensions of innovation, and that means launching new products or new campaigns.
Our HomeTeam campaign has been our biggest campaign ever in the history of adidas, where we are using 60% of our global assets in promoting our brand and engaging with consumers, where we have new campaigns within the framework coming up every single day. It has been a new way of engaging with the consumer and a way that what we see forward will be an extremely effective way. As you can see, it has been our most effective campaign ever. At the same time, products also continue to sell. Our Superstar, which celebrates its 50 years anniversary, was up 20% in the first quarter, despite the 20% down for the company. Our Predator football boot was up 30% in the first quarter.
Not to forget, whereas a while ago, the launch of the Beyoncé Ivy Park collection in January was instantly sold out and continues to have an extremely high buzz. It means that we have one of the most exciting females related to the entertainment industry working with adidas, and we're very excited with the future launches that are coming. While we speak about a quarter in great crisis, we have been able to see a number of successful product launches, story launches, and also new collaborations. When I look upon the strengths and weaknesses, we were actually off to a good start before the coronavirus struck. After the first two months, we were running at an 8% growth excluding APAC. Very similar to what we've seen in the past on the higher end.
We also have immediately put a number of effective actions in place to keep our people safe. As I said, 40,000 people are working from home, and we've had a very low exposure to the coronavirus within the adidas family. We've done an extremely fast shift of resources towards digital, not only product and money resources, but also people resources from within our organization, where we're taking traditional IT resources and allocated them to speed up our development of our digital platforms. We've built sufficient financial flexibility within our company. Of course, there are also things that gave us a lot of challenges. The rapid global outbreak of the coronavirus and the speed. It hit particularly in the beginning of March with Europe, U.S., and Latin America being impacted within three days.
The headwind from the exposure we have to Greater China which will in the longer term be positive for us. Of course, with a 23% share of our business coming from China, we were very much exposed in the first quarter. The elevated inventory levels that are coming out of this, not only for us or the sporting goods industry, but for the globe as such, if the globe closes down for six weeks, not having elevated inventory levels would be, I would say, a misjudgment, and we'll continue to be able to deal with that or have to deal with them moving forward. Of course, from a numbers standpoint, material decline in our profitability for the first quarter down more than 90%. This brings me to the P&L at the glance. Revenue decreases 19% in currency neutral and also nominal to EUR 4.753 billion.
The gross margin down 420 basis points to 49.3%. Due to the decline in most markets, the operating margin down 13.5 percentage points down to 1.4%, and net income from continued operation down 97% to EUR 20 million. Basic EPS down a bit less 96% to EUR 0.13 per share. If you look upon the strategic growth areas, North America grew 1% but had double-digit growth into end of February. We had the store closures. Greater China down 58%, and particularly around the Chinese New Year and end of February, heavily impacted. We're seeing a recovery starting to materialize in March, which we'll speak about later in this presentation. Our e-com up 35% for the full quarter, up 55% in March, and up a triple digit in the beginning of April. We are clearly seeing a huge business migration towards e-com.
From a brand standpoint, the adidas brand was down 20% and the Reebok brand was down 12%. The reason why the Reebok brand was down less than the adidas brand was the relative lesser exposure overall to Asia compared to adidas. That picture will, of course, change moving forward. I would still say we still have very, very strong product launches, whether with Superstar, Yeezy, Beyoncé, and even Adilette, which I'll get to later. With this, I'd like to hand over to Harm, who will take you through the financials in more detail. Harm, please.
Thank you, Kasper. Let's start with the development of our market segments. A look at our regions on the world map illustrates how the coronavirus and its negative impact on our business model actually moved from east to west. Asia Pacific was impacted first and most severely in Q1, with revenues down 45%, mainly driven by a sales decline of around EUR 800 million or 58% in Greater China. This includes the take-backs in the triple-digit million EUR amount to manage the inventory levels in the market.
While stores in Greater China and South Korea reopened during March, closures came into effect in most other parts of the world. Up until this point, we had a good start to the year with 8% growth by the end of February, excluding APAC. Europe was up in the mid-single digits, while most other regions posted double-digit growth in the first two months.
Closures hence significantly weighing on the first quarter sales developments in emerging markets with -11%, in Europe -8%, Latin America flat, North America +1%, and to a lesser extent, in Russia, CIS +9%. Declines in regional operating margins correspond to the revenue shortfalls reflecting the operating deleverage. When we take a closer look to the P&L in Q1, as Kasper mentioned already, the 90% decline on the net sales, both in currency neutral and nominal.
If you go a little deeper in gross margin, a decline of 420 basis points to 49.3%, driven by less favorable regional mix due to the over-proportionate sales decline in Greater China and negative FX developments given the strong dollar. In addition, we recorded cost in a high double-digit million EUR amount related to the cancellation of purchase orders from suppliers in Asia to adjust the inbound flow of inventories to the current circumstances.
This alone accounted for almost two percentage points of the gross margin decline. Operating expenses, -1%, and as a percentage of sales, plus 9.1 percentage points. Starting with the marketing investment. Marketing remained stable as we executed the majority of our consumer marketing and product activation efforts in full during the first two months of the year and accelerated investments to support e-commerce. Operating overheads decreased 1%, including the impact of higher bad debt allowances. More details on our approach to cost flexibility I will give you later on. Operating profit declined 93% to EUR 65 million, and the decline reflects operating deleverage due to the revenue shortfall. This includes a combined negative impact of around EUR 250 million from the product takebacks in Greater China, the cancellation of purchase orders, and the increase in bad debt allowance. Again, the takebacks amount to a EUR triple-digit million amount.
The cancellation of purchase orders and the penalties associated with that is a high double-digit number. Again, we accepted this hit in the P&L in Q1 to prepare for a healthier second half. On the net debt and equity position, the net debt amounted to EUR 570 million at quarter end. This represents a deterioration of more than EUR 1.4 billion compared to the net cash position of EUR 873 million at year-end. The net debt position still is modest in historical context. You see 2016 and 2017 was closer to EUR 1 billion. More detail on the liquidity developments and measures later on. The equity ratio remains solid at over 32%. On the development of the operating working capital. Only moderate increase in average operating working capital to 19.4% as a percentage of sales.
Inventories were actually up 36% currency neutral due to the inevitably lower than expected product sell-through caused by the broad-based store closures and consequently lower shipments to our retail stores or to our wholesale accounts. Receivables down 5% currency neutral, partly driven by lower shipments towards quarter end. Payables were up 25% currency neutral, also reflecting measures to manage our cash outflows. I would like to give you some more details on the priorities that we set as a management team in these unprecedented times. With our current priorities, we are striking the balance between short-term challenges and long-term opportunities. Health and safety of our people and community, of course, remains the top priority. Four of our further priorities to be covered in this section. The operational flexibility. We have plans in place to manage our inventories and our cost. The financial flexibility.
We explained the decisive measures we have taken and the access to additional liquidity. The digital opportunities. E-com, more important than ever before. The learnings from China as the first major markets on the road to recovery. I'm going to discuss our operational and financial flexibility. Kasper then is going to cover digital and China. Adjusting our cost base to protect cash and profits given our lower top line is the number one priority. Of course, we are doing this case by case in order to not jeopardize our future prospects. When we go into the details of our cost, I would like to decompose a little bit based on the fiscal year 2019 and what our flexibility is in 2020. Of course, again, the cost focus on tactical measures to not jeopardize our future prospects.
When you look at the operating overheads, which is more than two-thirds of our cost base. Personal expenses are largely fixed. We go through these unprecedented times with our 60,000 employees and remain committed to protecting their financial security. We execute on strict saving plans in logistics, travel and entertainment, IT projects, and anything that is discretionary in spend. We also have flexibility in e-commerce and DCs or warehouses, but consider those areas to be critical for our store that is open 24/7, which is digital. On the marketing side, which is almost one-third of our cost base, we realize savings through variable endorsement contract components and the cancellation of physical events. We also remain committed to brand-building sports marketing contracts and campaigns. Kasper talked about the #HomeTeam, which levers more than 50% of our global assets in the campaign.
Different to Q1, where we had limited time to react to the rapid global spread of COVID-19 towards the end of the quarter, both operating overheads as well as marketing investments will be down year-over-year in Q2 in absolute terms. We also have a plan in place to arrive at a healthy and reasonable inventory level at year-end. First, it's a proactive order management to align deliveries towards lower demand and repurpose and liquidate existing inventories through the course of the year. The first chart that you're seeing here right now, and please understand that the bar chart that you're seeing here are illustrative by nature. Don't calculate every bar chart. It's an illustration. You see that we placed orders in the blue chart that will be delivered.
We also placed orders that we have actually postponed to later quarters or later months. We actually canceled some orders proactively as well. All the cancellations have been in close alignment with our suppliers. That's how we are managing the inflows of inventories through three distinct measures. Of course, we are optimizing the inventory flow through the full year as well as we are starting with an elevated inventory level. We are pulling several levers to deal with the existing inventories. First, there's evergreen products that will be repurposed into 2020 products. These are not just the Stan Smith and Superstar. There's a lot of products that will be as relevant in spring/summer 2021 as they are in 2020. The majority of remaining products will go to our own operated factory outlets.
We have 1,100 factory outlets globally, and we stopped ordering for these outlets to clear some of the inventory that has been built or will be built in Q2. E-com will also provide an opportunity to clear inventory through commercial moments and major online sales events throughout the year. The most prominent will be Cyber Week. It will be Singles' Day or Double 11 in China. A smaller portion can also be moved through selective retail partners. However, I want to be very clear, we do expect a promotional environment as the closures affect the entire industry in the second half. Against that background, arriving at reasonable inventory levels at the end of the crisis is a clear priority for us. That is also reflected in operating working capital targets we have reintroduced for all markets, whether it's in inventories or receivables management.
We have also taken some decisive measures to ensure additional liquidity. The current situation poses a challenge even for healthy companies, in particular when it comes to liquidity. We have sufficient financial flexibility. We suspended the dividend and the share buyback. We reduced management compensation. We will use existing cash buffer and tap into unused credit facilities and access to the additional EUR 3 billion syndicated loan through KfW and partner banks, which we'll use to bridge this unprecedented situation. I would like to show you some more details on the cash outflow in Q1 and the cash development in Q1. Let's take a closer look at the cash consumption first. As you can see on the left-hand side, the over cash consumption of EUR 1.4 billion was primarily driven by operating working capital of EUR 1.1 billion.
Of course, we had to share buyback and then keep investing in our company with CapEx. The outflow was limited by effective measures, roughly EUR 300 million, to maximize cash inflows while minimizing also outflows. That's what you see on the right-hand side. The right-hand side also displays where we tapped into existing credit lines and other sources of funding, roughly EUR 1.2 billion. As a result, we had a cash position of EUR 2 billion at the end of March. EUR 1.3 billion of that is directly accessible at the AG level, while EUR 700 million is sitting in foreign subsidiaries. What is our total accessible liquidity on a decomposed basis? As explained on the previous chart, we had EUR 2 billion of cash at the end of March.
We have already repatriated some cash from foreign subsidiaries, but there's still EUR 700 million sitting in these subsidiaries that are not readily available and are only partially available to us. We now have also access to an additional EUR 3 billion through the KfW syndicated loan. EUR 2.4 billion from KfW plus EUR 600 million from our consortium of our partner banks. Let me be very clear. This revolving loan comes at customary market conditions. It does not include any government subsidy or any equity position into adidas. We will make use of this loan to cover our liquidity needs during the current crisis. We will pay back any used part of the loan, including interest and fees, as soon as the situation normalizes.
As nobody knows when this will be, we can also not predict reliably at this point in time to what degree we are going to make use of the credit facility and when will it be paid back. We aim to make use of other funding sources as they become available in order to substitute the syndicated loan. In sum, we have direct access to EUR 4.3 billion of liquidity, which provides us with sufficient flexibility. With that, I would like to hand over to Kasper again.
Thank you very much. Harm spoke about the impact of the balance sheet. Let me now go back to the P&L. There is no doubt that the one store that is open in the world is e-com, and we've been using that very strategically, not only in the last six weeks, but basically since 2016. We originally had a target of approximately EUR 4 billion for 2020. Despite the fact that we have a, I would say, meltdown of the global trade environment, we've now raised the target to beyond EUR 4 billion. What we've done is we reallocated resources across the organization, whether it's technical resources, marketing resources, or sales resources, to ensure that we accelerate the growth that we'd originally planned. We're driving brand awareness in digital sales through consumer-facing campaigns and well-received product launches. I spoke about a number of them today.
As I said, we're looking upon and using e-com as a mitigation to minimize impact of the potential disruption. While we're making great progress in this area, let me just one thought, one moment of caution. Of course, we will not be able to subsidize the business we will be losing completely in our brick and mortar. What we are doing, we're dramatically accelerating our e-com business and also for the long term, moving into a more D2C-focused setup. What we did was, as I said, we doubled down and raised our targets. We're prioritizing in our supply chain and reallocating inventory to e-com, meaning that in the past, we would have inventory that was reserved for wholesale orders that has now been reallocated, and of course, making certain that our e-com business can get access to all of inventory.
We're focusing product launches on our digital channel. We're shifting, as I said, marketing investments towards digital, so increasing our marketing spend. We're reallocating people from the entire organization to where that makes sense within our e-com setup. We're also having efforts to support growth in our digital partners business, so the wholesale business. That means that not only the Zalandos of this world, but JD, Foot Locker, et cetera, who all have digital channels that we continue to collaborate with them and cooperate because part of our business is coming through that channel environment. That is not included in the numbers I'm speaking about up here. A strong increased focus on our e-com business to make certain that in the short and the medium term, it will help the company. We also leverage our integrated digital ecosystem to drive brand awareness and sales.
We do hype launches such as Yeezy or Beyoncé or 4D. We engage consumers through free premium access to our running and training app because we know when people engage through our app, we have a higher conversion rate. We're launching social media campaigns like HomeTeam campaign, the most successful campaign we've ever done. That means that the successful e-com growth we had as approach from creating the new from the previous years will continue to move forward, and we believe we have built a proven recipe for success in digital.
When we look upon China and trying to take the first learnings out of China and understand how can we apply these learnings to the road to recovery for other markets, we're looking upon and seeing the retail business are recovering since stores opening at the beginning of March, but traffic and conversion trends are normalizing over time, but they're below normal rates. Even when traffic goes up, conversion still remains lower. We're seeing e-commerce business also impacted during February, but recovers much quicker, driven by aggressive doubling down on digital channels. We see the same in other markets. When a market closes down, it also brings initially the digital channel down, and that then recovers after a couple of weeks. We've built a successful strategy to revitalize retail after the end of the confinement period, creating brand moments and campaigns to drive traffic and conversion.
It's clear that when the stores have been empty for four, six, eight or maybe 10 weeks and consumers have not been in the store, it takes a while to get people back into the store and convert. We're taking all the learnings from China and building that into a recovery plan for the rest. What we're giving you here is a chart which is indicative of what we have. The China D2C business, so the direct-to-consumer business, has shown a rebound after the sharp decline in February. We're seeing sales growth in own stores turning positively beginning of April, however, mainly driven by commercial moments we created in our own stores, that will continue across the board for the entire industry. We see sell-through levels in franchise continue to below prior year level, partly due to commercial moments, but also partially due to locations.
We're seeing traffic conversions in-store normalizing gradually over time rather than instantly, that means that the new normal is not I go back and did this week what I did six weeks ago. It takes a while to come back to previous levels. As we said, e-commerce was also impacted, but less and recovered earlier. In China, e-com accelerated to triple-digit growth in the first weeks of April. Let me just pause here and just repeat the e-com number. E-com was 35 for the quarter. It was 55 for the month of March, and in China, it's now triple-digit in April. You can see the rapid acceleration we're seeing in e-com. We're seeing similar chart and developments in our other regions, as you see on this chart, with a delay factor. You're seeing relative improvements in all markets as time goes by.
We're taking the proven setup from China on how to stay engaged with the consumers and restart business. We believe we need to serve the consumer's needs in digital also during the lockdown, irrespective of whether a transaction will take place. That means we stay in touch with consumers and celebrate end of confinement period with them, try to make certain that they understand we're coming out of a closure. We initiate commercial moments to drive traffic after restrictions were lifted. We're confident that 2022 will only be temporary dip in what is a long-term growth story in China. We've seen double-digit growth from 2015 to 2019, and we're confident that China will go back to previous growth levels. As we come to the outlook, w e focus so much on the COVID-19 that sometimes we forget that we actually have a normal company to run.
Our product engine continues to run, now digitally. We have a record sales. Our yoga mats fit from home, keep our communities alive. The iconic Adilette growing triple-digit in April as we activate our launch wear products. People now start using the Adilette as their home shoe. We're expanding the UltraBoost franchise with new Primeblue recycled models. We celebrate the 50-year anniversary and are celebrating of Superstar with a unique Pharrell collaboration. As I said, we grew the business 20% in the first quarter, despite the overall business being down by 20%. We see three years of 4D in May and continue to scale across categories and price points. The Reebok Zig Kinetica continues strong performance in our D2C channels and with partners.
What I'm saying is we continue to create products. We continue to bring products into the market, now just predominantly through the digital channels. When we look upon how do we get through this, we look upon it in 3 stages, managing the storm, coming out of the storm, and managing the new normal. The managing the storm is partly what we spoke about before, is how do we get our balance sheet under control, generate cash flow that allows us to make the right decisions for the future, and that contains the health and safety of our people, the right operational flexibility in our supply chain, ensuring that we have the financial flexibility to maneuver and going after our digital opportunities.
Coming out of the storm is understand how the changing preferences and shopping behaviors impact our business in the future, that's where digital and D2C helps us. The ramp-up of locations when we can, we're not only in control of that ourselves, of course, it's very much under government scrutiny. I think what you're seeing in the weeks to come is going to be one of the most important moments is the opening up of Germany, which is the first major country outside Asia that is opening up, and you're seeing a slow sequential opening up of retail environments. Pending on the learnings from this, I'm certain that many countries will draw their own conclusions and make decisions, but of course, I'm certain impacted and also influenced by the learnings of Germany. Making certain that we have the right resource and inventory reallocation.
Where do we have inventory? How do we spend it in the most appropriate way? Refocus on the long-term strategy execution. We want to make certain that we're capable of taking the long-term right decisions for the company, investing in the right store, the right place, or investing in the right sport asset, which is why the financing is so important for us, while at the same time being very prudent on the cost side. Coming out of the recession or the normal understanding what is the impact of, do we have a global recession? Which kind of economic uncertainty will come? We're certain that health and sport will be even more important moving forward. I spoke about before, and I'll reiterate here, we are very confident that the very positive position of sport will continue and will be enhanced moving forward.
Brand strength matters. That's why we continue to invest in the brand because it is going to be a consolidation around the big. It has brought and will continue to bring a fast forward of the digital transformation for our industry, but also for our company. If you look upon the current situation, we are right now trading an environment where 70% of our stores are closed or 80% are partially closed. It's a very different trading environment that we've had. At the same time, we are working on how does the world look beyond this position and engaging very deeply with local authorities to understand how we can open up. This is the trading environment you've seen through April. That means that 70% of our stores have been completely closed, approximately 10% have been partially closed.
All countries, more or less, with the exception of China and Korea has been closed. The only global store is online. Our picture should not be any different to pretty much any other picture in the world because what we're describing here is the consequences of the legal decisions that the countries in the globe has taken. Of course, it has had a significant impact on our business. That brings me then to the outlook for the second quarter. We expect revenues to be down by more than 40%. In Q3, only three countries were impacted for a prolonged period, China, Korea, and Japan. In Q2, China and Korea are recovering versus Q1. E-com is accelerating versus March, the 55%, but almost all other stores have been shut for the first month in Q2 and will most likely stay shut for a while.
We lost more than EUR 1 billion already in April. Obviously, Q2 sales will decline as we've seen the start, and it will be more outspoken than in the first quarter. We expect a revenue decline in the second quarter of more than 40%. The Q2 operating losses in the triple digital million range. We have taken the flexibility in our cost base and are making use to make sure we protect cash and profits. Margin working budget and operating overheads are going to be down in absolute terms in the second quarter. At the same time, we also remain committed to protecting our employees' financial security. We need to make certain that we have a sound and well-functioning employee base that will allow us to start up when the startup happens.
That's why we need to make certain that we take the right decisions, not only from the employee base, but also making certain that we don't take any decisions that jeopardizes the future prospects of our business. Again, dilution Q2, given the more pronounced top-line growth. The outlook is based on the following assumption. Our current assumption is that we will be able to sequentially reopen stores throughout May and June and have a largely operational store base by the end of Q2. In Europe, we've already started to open selective stores. 20 are open and 20 more to come. In North America, we expect to start with the first reopening of the stores mid-May. However, there are still many uncertainties as we manage through 2020.
The speed of recovery in China, plus the risk of setbacks, the duration of store closures and openings in the rest of the world, the economy and consumer sentiment, and excess inventories across all markets. That's why in the context of this, we do not believe it's possible to provide the outlook for 2020 that includes the impact of the coronavirus, but we'll give you a quarterly outlook as we speak. When it comes to our strategy, we will hereby inform you that we will now present our strategy in March 2021, because we do not believe that we can present it in the right environment by the end of 2020.
We see that the global economy is still very volatile. We want to make certain that we have found a position of a high level of stability, not only for the global economy, but also for the company, to ensure that we give you the right economic outlook for our next five-year circle. We believe that despite the challenges that we have seen, there is an opportunity to become a circular winner from this crisis based on what I said before, the move and acceleration towards a more healthy lifestyle, the increased focus on digital and the consolidation around fewer and stronger brands. That brings me to the summary. We're focusing on navigating the company through this period of time, which nobody has seen before. We're using our operational flexibility that is sufficient and also our financial flexibility.
We're doubling down on digital channels and tools to ensure that we migrate our company faster towards the D2C setup. We're seeing the structural industry trends being amplified and accelerated, which in the medium term is an opportunity and a positive for adidas, and we believe enabling the long-term success by preparing for the new normal, dealing with the current, but make certain that we prepare for tomorrow, and we're doing both in parallel. For this, I'd like to thank you for your patience, and Harm and I now look forward to taking your questions. Thank you.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question. The first question comes from the line of Graham Renwick from Berenberg. Please go ahead.
Good afternoon, everyone. Hope everyone is safe and well. Just a few questions for me, please. Firstly, on gross margin, is it possible for you just to break out the components of that 420 basis point decline in Q1? In particular, what was the discounting element of that? Was there an inventory provision or increased inventory provisioning in Q1 COGS for future markdown, given the elevated inventory levels you have, and if so, how much? Secondly, on e-commerce, just wanted to get an understanding of how much of that sharp increase in growth had been driven by promotional activity versus underlying demand. When we think about the new target for over EUR 4 billion sales, is there going to be a lot of clearance within that that won't repeat next year?
Is that going to be a sustainable base that you can grow the e-commerce business off next year? Ultimately, will you have a structurally higher share of e-commerce going into next year? Thank you.
Graham, starting with the 420 basis points on the gross margin, as I indicated earlier, of course, there's market mix and there's FX in there. There's limited promotional activities in there, just limited to China. Otherwise, it came too late in end of March for other markets, so it was normalized as you saw. The remainder is PO cancellation, the penalties for that, where I said it's a high double-digit amount. Of course, there's an inventory revision in there as well, but, as you know, based on our policies, the inventory buildup that we have in Q1 is pretty much current inventory that we're having of spring/summer 2020. It's only a limited amount of inventory revision in there. When it comes to your e-commerce question, we don't do the split out between promotion, non-promotional driven revenue.
You should assume, particularly in the latter part of the quarter, that more has been promotion. Just remind you that we did not see the close down of the three regions or Europe, U.S., or Latin America before around the 15th, 16th. From a clearing standpoint, of course, part of it is clearing. Harm also very clearly said we have 1,100 factory outlets. Of course, they will, for next year, be the primary clearinghouse for us. We need to find the right balance. I do believe that the foundation we're putting up will be a sustainable one because when consumers get used to shop online, frankly, they shop online with and without clearing. We will be using, of course, also this year, our factory outlets as primary clearing channel.
Right now, because they're not open, we force sources to use e-com. Over time, of course, that will migrate more and more to our factory outlets.
No, that's great. Thanks. Can I just follow up? Is there any sort of stats you can give on sort of the greater engagement you're seeing through digital channels? For example, how many more people have signed up for your or downloaded the app in Q1? How many people have signed up for the Runtastic apps? Is there anything you can sort of give there, give us a sense of the greater engagement you're seeing there?
We don't give those stats out, of course, you can assume there is a correlation between the revenue growth and the stats because we are seeing a very strong revenue growth.
Okay, great. Thank you very much.
The next question comes from the line of Geoff Lowery from Redburn. Please go ahead.
Yeah. Hi, team. Two comments, please. Firstly, can you help us understand what your approach is to inventory that sits with your channel partners outside China? Obviously, you took back a significant element of inventory that was sitting out there in China. Can you help us with the strategy ex-China? Secondly, just on gross margin, to understand the 200 basis points or so that you've taken for cancellation and adjustment to forward orders, does that get your full year buy into line with where you want it to be? Or will some element of the charge for that recur across quarters 2 to 4, please?
Geoff, probably starting with the gross margin, as you indicated on the PO cancellation, you can assume that this is largely covering what we had to adjust for the full year, assuming also the recovery in the second half through the net sales. Assume it's a hit that we took in Q1 to be at healthier levels in the second half and based on our order windows, that's where we had the flexibility also towards the end. Assume it's largely covered in the first quarter.
Great.
Secondly, on the inventory approach, we are not exactly repeating what we did in China. In China, when we did the take back, it was an isolated event. In China, where we did it for China, and of course, this will, as Kasper mentioned, be cleared through the factory outlet network that we have in China that is also open in China as we speak. We will have a different approach in the rest of the world, where we have been better prepared now based on the learnings also from China. We are working with our account relentlessly. We are now adjusting the seasons where we are shifting, as I indicated in our bridge as well, we are shifting the season by four weeks or six weeks. We are planning more diligently what are the carryovers in spring/summer 2021.
It's a much more strategic approach, relative to the tactical approach that we had in China. Do not assume that we have a similar approach for the rest of the world as we have seen for China in Q1, and with the respective impact on Q1 financials.
That's great. Thank you.
The next question is from the line of Piral Dadhania from RBC. Please go ahead.
Thanks very much. Afternoon, everyone. If I could perhaps start on with North America. I believe that was the only region to see a significant gross margin gain of 280 basis points. Could you just help us understand what the drivers of that gain are? Was it channel FX or perhaps anything else? Equally in North America, I think OpEx increased by close to 30% in the quarter as well. Could you perhaps just help us understand whether there's anything specific to call out there? Secondly, just in terms of the EUR 250 million one-off, could you perhaps just break out how much of that was in COGS and how much of that was in OpEx related to product take backs, bad debt provisioning and forward cancellations? Thank you.
Yeah. Starting with North America. Of course, the gross margin indeed, you identify that is better than prior year. Again, you always find the comparable quarter. As you remember, we had the capacity constraints last in the U.S., where we had some challenges to get the product in. That's why it's positive in Q1 2020 relative to the negatives that we had last year. You had the question on the operating overheads. Yes, it's also comparable to last year, where we had the additional supply chain cost and not the air freight, because that is in the margin, but there was the additional cost that we had to bring the product in. We had additional operating overheads, not just last year, but also this year as well. On the one-offs, as I said, the PO cancellation is primarily in the gross margin.
There are some, of course, in the market mix, you see it in the gross margin as well, and some of the take backs from China you will see in the gross margin. Primarily what you see in the bad debt is on the operating overhead.
Thank you.
The sixth question is from the line of Elena Buriani from Morgan Stanley. Please go ahead.
Hi, good afternoon and thanks very much for taking my questions. My first one is about your performance versus peers. I'm talking about Western peers and also to a certain extent, Chinese peers. I was curious to understand how you explain the delta in performance versus your main competitors, which seems to have posted or guided to a milder P&L impact from the virus. Is this because you're buying back more stock, so you're taking a larger hit initially, while perhaps others will take a more gradual approach? Or is it because of a different distribution structure, mainly in China? Is there anything that we've been missing just because, particularly in China, even if you exclude the impact from your inventory buyback, the underlying performance seems to be poorer versus the other peers? Second question is about the moving parts of your working capital.
Could you comment on the relationship and the dialogue you've been having with your suppliers and retailers? I was looking at your Q1 moving parts and I was curious to hear whether you've been given some extension in the payment terms by your suppliers or maybe simply you're using the maximum headroom available. Same questions for the retailers. Which sort of flexibility are you giving them on payment terms? What have you been agreeing with them on the future selling and the level of discounting they will be able to apply to unsold products? Thank you.
Elena, let me start with the first question, and Harm will take the second question. Right now, there is no peers that are reporting the same time period, and I think that's the most important part here. The coronavirus started around the 20th of January, and depending on which reporting cycle you have, you actually have different closure dates. To the best of my knowledge, I don't believe there's any of our peers that reported a first quarter that's identical to the calendar quarter. For me, that is the most important one. For us, I don't know where the comparisons are coming.
The comparisons that we have, which is the only one we can have, is we've looked upon online trading on the Chinese trading platforms, where we actually been either number 1 or number 2 consistently in the last, I would say, eight weeks on online trading. The reported trading within the period, I do not believe, and maybe I'm wrong, but I have not seen any of our competitors coming out and reporting Q1 comparable numbers from a timing standpoint to us. That's why I can't comment on it, because I simply don't believe anybody has done it.
The second question on the operating working capital. First and foremost, we worked with all our suppliers to make sure that we're going through it as partners. Of course, we reviewed the payment terms. We also reviewed the utilization of our suppliers, and everything was in good collaboration with our suppliers, that we stay healthy on both sides. Of course, beyond the trade suppliers, we have non-trade procurement as well, where we rather talk about the IT projects or other discretionary spend that we have, where we extended our payment terms, and you saw a part of that in the pay bills. When it comes to the retailers, it's a market-by-market account approach. As I said, we are not repeating what we did in China with the product take-backs.
We have a different approach in other markets, and depending on the account, there are different strategies to it that our sales team are executing, depending on when it's opening, depending on what the inventory levels are, depending on what the overdue of the receivables are. As you mentioned earlier, we are definitely very diligent on our collection side as well, but it's a give-get scenario, account by account and market by market.
Great. Thank you. Maybe just one small follow-up. Is it fair to say that in China, you're practically done everything, you've bought back as much as possible, so you're ready to restart with some new fresh selling, while perhaps in other markets, it's going to take more time for the inventory to be cleaned up, given that you cannot use that one-time approach?
That would be a correct assumption. The one caveat you should have is, of course, is the Chinese inventory matching the sell-out. We expect China to be back to previous level by the end of this quarter. The end of the quarter, you're reaching the same trading level. Of course, that assumes that forecast is correct. Right now, that is the indication that we have when we look upon the daily trading increase in China, online and offline. Of course, that's an assumption that we're having right now. All assumptions are volatile.
Understood. Thank you very much for all the clarifications.
Thanks.
Next question is from the line of Jürgen Kolb from Kepler Cheuvreux. Please go ahead.
Yes. Thank you very much. Two questions. First of all, on the CapEx line for this year, maybe a quick word on what you're planning for the full year, and also in this respect, with respect to the own stores development. As you push more the online business, does that mean that you're planning more store closures this year? Maybe with a little view on the next years, what you think will happen at your own retail business in the physical stores. On the debt side, of the EUR 2.1 billion bilateral credit line I believe you have, how much of that is drawn at this point in time? Thank you.
On the first one, on the CapEx line, Jürgen, of course, we reviewed every CapEx spend that we have, and we delayed some of the retail expansion. We have delayed some of the remodeling. We're optimizing it. We definitely reviewed some of the IT projects. Based on the guidance that we have given, assume it's significantly below that guidance without raising a new guidance now for CapEx specifically. We went through every line and we significantly reduced that one.
When it comes to the credit lines, I'm not going to give you the details what has been drawn, but you can see in the bridge that I presented earlier, there has been EUR 900 million has been drawn on committed and uncommitted lines, and there's been EUR 300 million extra financing that we have realized. EUR 1.2 billion is additional cash that we brought in the first quarter. That's as much as I can say about that.
Sorry, with the own stores, your own retail stores, maybe more closures this year than initially planned?
They will evaluate the situation as we see it moving forward. There's no doubt that in certain areas, there will be store closures. I would not rule out that we'll do store openings. If we believe we can find the right retail locations at the right price that we know is long-term appropriate for the company, I would not rule that out. Right now we're looking upon it, and it very much depends upon what is the opening scenarios, and that will to a certain extent drive it. We have done a substantial quote, unquote, "remodeling and cleanup of our retail fleet in the last couple of years and have a fairly updated retail fleet.
Very good. Thanks, guys.
The next question is from the line of Warwick Okines from Exane BNP Paribas. Please go ahead.
Yeah. Good afternoon, everyone. I've got two questions. Firstly, could you give us a sense of the scale of newness product launches that you've delayed and postponed as a result of the lockdowns? It doesn't sound like you've delayed a lot so far, but just interested in your thoughts on that. Secondly, on cost savings, thanks very much for the very helpful charts around flexibility for 2020. Could you comment any more about Q2, though? Because the dynamics obviously are quite different in Q2, having so many stores closed. Are there differences or should we use the pie charts that you've given us as a decent guide for our estimates for Q-
I'll take the product launches. We have made very few changes to our product launches in the past quarter, and also the quarter to come. Because a lot of the product launches are related to the season. If you want to have a summer product, there's no point in delaying a summer product to a fall launch. We have the products which are time relevant, and then what we have, we call the evergreen products. The evergreen products will have carryover with, so that means they will last longer. It could be a black pair of adidas trousers with white stripes on. They're not very relevant to the time. Of course, your other products will continue to either from a relevant standpoint due to the season or simply because we're operating within a architecture.
The architecture would be the 4D products where we continue to evolve and develop new products or new running series of SL20. Those we of course continue to launch, and now we've just chosen to launch them online, and we believe it's the right way of doing it. Continue to overall launch around the calendar. The evergreen products is that the black training pants or the Adilette, they will have a longer lifetime than maybe normally. Overall, we have not had a big change in our launch calendar.
On the cost savings, Warwick, of course, as I said, we will be below prior year in the second quarter. Still there will be deleverage. What we need to balance is the technical measures that we are implementing without jeopardizing our future prospects. Again, we are protecting our 60,000 employees. We of course, we had more time to go deeper into the cost base for Q2, and that's what you will see. Do not expect that we can mitigate the significant sales decline on the cost side. It will be below prior year, both on the marketing and on the operating overhead.
I would like to just mention a point that Harm touched on before. With the acceleration we're seeing in e-commerce, that is flowing into operating overhead. When you see that we came from 35 to 55 and triple digit in the month of April, that is an expense that we're seeing occurring in operating overhead. I just want to make sure that you have that as a reference in your modeling.
Okay. Thank you very much.
Thanks, Warwick.
Next question is from the line of Omar Saad from Evercore ISI. Please go ahead.
Good afternoon. Thank you very much for taking my question, and thank you very much for the comprehensive presentation. It's very clear what your near-term and long-term priorities are. Two questions. I wanted to know, number 1, if you have a view on organized sports this fall, whether it's professional level or the youth and school level. I guess it's easier to think about the pro sports with testing, getting back on field, maybe not with full stadiums, but I think that the youth sport level, it's maybe organized sports and team sports, it's harder for us to understand how that might play out. My second question is on conversion. The comments you made in China around conversion, I was interested. Is the weaker conversion happening online as well? It doesn't sound like it.
Then in the stores, do you think the conversion is weaker with apparel versus footwear because there's a safety fear or trying products on in the dressing rooms? Are you seeing any different consumer behavior around traffic and conversion, younger consumers in China versus older? Any sort of color around those dynamics would be very helpful. Thanks.
On the first one, sports participation, this is a very difficult question because there's one element which is simply regulation. What does the different countries allow you to do? I'm speaking about the question you asked, not the big sporting events. There's a regulation element of it, that frankly, we have to go through country by country. That's why you cannot have a generic opinion about it. The opinion we do have is that we believe there is a greater level of interest in sport, particularly for youth. If you've been locked up for six or eight weeks, and I have kids also, and I think all of you have, they go crazy, because they want to go out and exercise. We think that that will continue.
Even if there is a more conservative approach to it, the likelihood that some kind of running or movement exercise is going to be allowed is very, very high, but you've really got to do it one by one. On online, we believe there's an increase in online conversion, there's a decrease in in-store conversion. We believe the reason why there's a decrease in in-store conversion is that consumers are just trying to get back and live a normal life again and starting to see what's in the store. We think over time, that will normalize. We do not report whether it's by category, but the most important part is to get traffic up, get people start feeling comfortable in the store. We do not believe. I would say the following.
We have not run the hypothesis that there should be a lower conversion rate for footwear versus apparel. That's not the indication. We have neither pro or con. Right now, we're just seeing an overall lower conversion rate. Of course, as I said, the primary interest we have is getting traffic back into our store, and the more we get that, then over time, conversion will go up again, we feel comfortable about.
Thank you.
Next question is from the line of Jamie Merriman from Bernstein. Please go ahead.
Good afternoon. Thanks very much. The first question is whether you could speak to any learnings that you've had from the impact of coronavirus in terms of e ither reinforcing your strategy or reshaping it beyond the digital transformation that you talked about. I'm thinking, as you think about these issues like conversion in stores in China, does that cause you to think differently about using an app in-store to check out for consumers, for example? Are there any other things that you've taken away from this that will cause a shift in how you're thinking about the use of the store? Second, can you just clarify exactly what the Q2 guidance assumes in terms of store reopening timing for North America and Europe? Thanks.
I would say that the biggest, I would say, not learning, but change within our strategic framework or underpinning our strategic framework is the acceleration of digital, whether it's how we communicate the use of apps, the direct transaction within our landing page or in our app, ship from store is definitely becoming more and more prevalent. A lot of stores were using, building inventories and shipping from a, I would say, a closed store. The digital acceleration, along with probably the presence of sustainability, are the two most pronounced acceleration points within our current strategic framework. We expect that also to occur across the board in other countries, because we are seeing it coming up and we're seeing increased acceleration of the app, the downloads of the app, and interest of also high apps like our Trilogy app.
Do you have it?
The store openings. I think Kasper mentioned that in his remarks that, Jamie, our assumption is that we will be able to sequentially reopen our stores throughout the month of May and June, and then have a largely operational store base by the end of Q2. For Europe, this means that we've actually already started to open select stores. The first 20 are open. The next 20 are going to come over the next week, and then we will have to see how it continues from there. In North America, we expect to start with first store openings in mid-May.
Thank you.
These are, of course, assumptions. Those assumptions will be impacted by local legislation. If it happens early, it happens early. If it happens later, it happens later. That is our Q2 outlook is based on what we just said here.
Okay. Thanks very much, Jamie. We have time for two more questions, Stuart.
Okay. The next question is from the line of Cédric Lecasble from MainFirst. Please go ahead.
Yes, thank you for taking my questions. I have two. The first one is on your marketing budget this year. Given the interesting comments on the shift towards digital, could you help us maybe understand kind of the big picture for marketing, and should we expect any volatility from a quarter to another in marketing spend during the year? The second question would be on the pile-up of inventories, given your ordering changes, cancellations, when do you expect the kind of peak of inventory buildup happen? Thank you very much.
When we look upon our marketing spend, as Harm indicated, a lot of our spend is closed down in campaigns. What you should assume is that overall, the marketing spend will be down year-over-year. You didn't see that in the first quarter. You'll see an acceleration in the second and the third quarter of that spend, despite the fact that we are taking our overall marketing spend for digital up. You'll start seeing it in actual terms. Actually, I think in terms of relative terms, makes less sense because of the volatility of the revenue lines. On actual terms, year-over-year, it'll be down in Q2, and of course, we expect it to be significantly down on the full year basis under the current assumption that will continue to be impacted also in the third and the fourth quarter.
Our current assumption is significantly down year- over- year, down quarter- over- quarter, up on e-commerce.
Yeah. On the inventory, based on our order patterns, the whole lockdown globally happened in mid-March, and the order month that we got impacted significantly still was kind of August and beyond. Of course, we went a little bit before that as well with some of the cancellations that I talked about earlier. Depending on the ramp-up that Sebastian just described, May, June, you should assume that June, July is probably the peak of the inventory buildup for us during the year.
Thank you.
Thanks, Cédric.
Next call from the line of Antoine Berthe from HSBC France. Please go ahead.
Good afternoon, and thanks again for this very useful chart in your presentation. Two questions. First of all, regarding China, I think you commented that you expected that region to come back to positive growth during the quarter. Could you maybe give a bit of flavor of the trends that you're seeing, and maybe, would that mean that you're still negative currently overall in China at the moment? Second question regarding your guidance for Q2. First of all, that triple-digit million, does it mean between EUR 100 million and EUR 200 million? What's the gross margin sort of guidance? Is it a decline which would be more severe than in Q1 or lower? That would be helpful. Thank you.
Antoine, thank you very much for your question. Let me clarify the China situation. We believe that by the end of the quarter, will be on or above previous year, but that means for the quarter, China will be below. We expect our online sales to be substantially above and our own retail sales to be substantially above. We still expect the franchise to be low, to clarify that. You should look upon the ramp of it, and it's a ramp by the end of it. For the guidance of the second quarter, as we said, pretty much the world, with two countries exception, has been closed for April. You should make the assumption that very little business outside, or no business outside, digital business being made in all regions besides Korea and China. That means that we expect a 40% decline versus a 20.
We're breaking even at the 20. I have to unfortunately say, you have to make your own assumptions, it is in the triple digit millions for what we're seeing. That is the best guidance we can give you at this stage for the second quarter. Right now, we're exposed to the same as everybody else, that's a closed down month of April. Of course, the opening up, as the previous question was asking, is the key. When are countries opening up, which are legally driven, what is the ramp in the countries? You can see the ramp, which we explained to you about in China. Maybe before we completely close, let me just make the following remarks.
While it's a very painful process to go through because we operate in an industry when a store closes, you don't sell anything but online. That has very clearly impacted our business, as you can see. The reverse also goes when the store opens up, we can start trading again. We have a more profound impact, we believe we have one that's probably of a shorter duration than others. We believe that, as I said, that the global trends for the sporting goods industry remain unchanged or even improved in the medium term. Of course, not in the short term, because that's why we're sitting where we're sitting.
The global trends towards health, towards sport, towards living a more casual lifestyle with having millions of people working from home has been very clearly substantiated through, quote-unquote, "athleisure." To change toward a digital setup and a D2C model with the implication it has from our gross margin and also operating overhead is dramatically accelerated. While we see 2020 being a very painful year, and I'm certain you would do the same, we do believe that the underlying trends are equally good or even better in the medium term. We have to get to the medium term, and that's what we're getting ourselves through.
We will take the right decisions in the company when it comes to cost, also want to say a lot of the assets that will come on the market might come on the market at a different price in the second and the third quarter because of demand supply. We want to make certain that attractive sports assets that could be on the market at a lower price point than normal, that we don't get ourselves out of that market and be jeopardized or be punished for that in the next five years to come. With this, both Harm, Sebastian, and I look forward to speaking to you over the next weeks and months to explain to you how we see the business. I can assure you that should we see deviation, positive as negative, we will keep you updated appropriately.
Thanks very much, Kasper. Thanks very much also to Harm. Ladies and gentlemen, this concludes our Q1 2020 results conference call. Our next reporting date will be August the 6th for our Q2 results. If you still have any questions, please feel free to reach out to Adrian, Christophe, or myself. I guess you know how to track us down. With that, I would like to thank you for your participation. Bye bye, and most importantly, stay safe. Bye bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.